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Eric Bloch Column

Parallel market must survive or economy will not


erdana; mso-fareast-language: JA”>By Erich Bloch

Government continues to rail against the parallel market in foreign exchange. It contends that it is the existence of that market that causes Zimbabwe’s insufficiency of critically needed foreign currencies, and that the rates of exchange prevailing in that market are the main stimulus of inflation.

Because it is so opposed to the parallel market, the pressures upon the Reserve Bank of Zimbabwe (RBZ) have steadily intensified, demanding that it ensure that the parallel market cease to exist. The result has been a witchhunt by the Reserve Bank, targeted directly at the banking sector and resulting in the imposition of fines of hundreds of million dollars upon numerous banks, and the suspension of the foreign exchange trading licence of one bank.


If RBZ succeeds in its endeavours to destroy the parallel market, concurrently with government continuing its dogmatic stance against realistic devaluation of the official rate of the Zimbabwe dollar, the result will be economically catastrophic. Because of the govern-ment’s foolhardy, steadfast resistance to the overdue and critically necessary devaluation, the destruction of the parallel market can only sound the death-knell for most exporters, be they in the mining industry (other than gold mining which depends upon an RBZ support price, also inadequate), in horticulture, manufacturing, tourism, the services sector, or otherwise.


Since Zimbabwe last devalued its currency on February 27 to an insufficient extent, being to a mid-rate of $824:US$1, exporters have experienced — in common with all other sectors of the economy — a huge increase in operating costs. During the period from that devaluation to the end of July, the consumer price index (CPI) rose from 4 182,3 to 9 560,9, which represents a rise in the rate of inflation of 128,6%. Allowing for further inflation in August, 2003, total inflation since the last devaluation must exceed 150%, and it is continuing to rise.


All that has maintained is a degree of viability for exporters, however limited, has been the existence of the parallel market for, after mandatorily surrendering one-half of all foreign currency earnings to the Reserve Bank at an official buy rate of $800:US$1, the exporter has been able to dispose of any of the remaining foreign currency earnings not required by him to fund imports and other foreign currency commitments, by sale in the parallel market, recently at a rate of around $5 500:US$1 (as distinct from the banks’ resale rate of about $6 300: US$1). Thus, the exporter attained a blend rate of approximately $3 150: US$1, which enabled him to continue operations notwithstanding the rampant inflation impacting upon his enterprise.


The destruction of the parallel market will also bring to the edge of liquidation almost all businesses that rely upon imports, be they raw materials, plant and machinery spares or otherwise. If all foreign exchange earned by Zimbabwe flows into the hands of RBZ, then — as recurrently evidenced in the past — government will direct prioritisation usage to purposes such as importation of food, energy, petroleum products, needs of parastatals and of government itself, with the private sector being accorded the lowest priority and therefore not only receiving an insufficiency of the foreign exchange which is its life-blood, but that insufficiency invariably being belatedly forthcoming.


This disastrous state of affairs must exacerbate the scarcity of foreign exchange, for as exporter enterprises progressively sustain increasing losses, their operations will contract and will ultimately fail, with the result that the extent of foreign exchange inflows will become ever less. A narrow path of self-perpetuating destruction of foreign exchange generation, and of the economy as a whole, will be that travelled by Zimbabwe. Government spokesmen repeatedly suggest that those who foreshadow the dismal decrease in foreign exchange availability are misguided or do so for evil self-intents.


They claim that if the parallel market did not exist, Zimbabwe would have more than enough foreign currency. That is spurious in the extreme, for it has long been an accepted, fundamental rule that “the sum of the parts can only be equal to the whole”. Thus, if the total foreign currency within the official market and within the parallel marked does not suffice to meet Zimbabwe’s needs, then the consolidation of the foreign exchange within the official market by the amalgamation of the parallel market into the official market cannot increase the total sum available.


Moreover, because shortages always stimulate black markets, be those shortages of fuel, of foodstuffs, of other commodities or of money, the endeavours of the authorities to bring about an end to the parallel market will inevitably increase activity within the black market. There is always someone who will flout the law and offer foreign exchange within the black market, driven by the attraction of profits or by the need to sell in such market in order to survive. Similarly, there will always be some who, in disregard for law, will purchase foreign exchange within the black market, be they driven by desperate need, fulfilment of which is a prerequisite for survival, or driven by such a loss of confidence in Zimbabwe that they wish to externalise assets, albeit unlawfully.


That black market exists, and continues to operate notwithstanding vigorous recent attempts on the part of the Zimbabwe Republic Police to contain it. As the availability of foreign exchange increasingly becomes more and more limited, so the prices for foreign exchange within the black market (and presently still within the parallel market) continue to rise, and thereby Zimbabwean inflation continues to soar, although admittedly there are also other causes of that inflation, including fiscal profligacy, mismanagement and abuse, corruption, declining productivity, and competition for commodities in short supply.


Thus, the RBZ onslaught upon the banking sector, including the placement of investigators from the National Economic Conduct Inspectorate (NECI) and from the Central Intelligence Organisation (CIO) in most banks, the recurrent imposition of draconian fines, withdrawal of licences, and the like, is not resolving Zimbabwe’s foreign exchange problems but is worsening them, whilst concurrently they must cause even greater shrinkage in foreign exchange inflows, and markedly higher inflation, business failures and overall economic demise.


The parallel market can be brought to an end without all these dire consequences if government and the Reserve Bank would realise that increased regulation and control are not the answer. For the parallel market to cease to exist and that cessation not have grievously negative repercussions, the first necessary step is to devalue the Zimbabwe dollar realistically, and to do so as frequently as is necessary to maintain purchasing power parity with Zimbabwe’s principal trading partners. It is fruitless to do as heretofore, of an inadequate devaluation as occurred on February 27, together with undertakings (which will not be fulfilled) that regular further devaluation will be pursued. On the basis of the last such assurance, Zimbabwe should have again devalued its currency at end of May, and yet again at the end of August. Neither of those devaluations have occurred, proving the shallowness of assurances, undertakings and commitments of the government.


Concurrently with that first step, Zimbabwe needs to facilitate and motivate increased export performance and foreign exchange earnings. Export incentives should be meaningful and not only tax-based, for the present incentives have a minimal real benefit for most potential exporters. An incentive which is grossly inadequate ceases to be an incentive! Similarly, the long talked-about and considered, but not implemented, relaxation of requirements for registration as an Export Processing Zone licensed investor must be energetically pursued by government.


It must recognise the very considerable economic benefit which would be forthcoming if existing enterprises, not currently engaged in substantial export of production, could be motivated to export by gaining such licence and the attendant benefits and incentives. In like manner, the export threshold for EPZ operations should be lowered from 80% of production to, say, 50%, with a staggered scale of incentives and benefits founded upon actual exports achieved.


And government needs to repair its relations with the international community, and restore an internationally acceptable political and economic environment so as to regain the support of that community and motivate foreign direct investment.

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